Higher minimum wage makes economic sense

20 May 2018 — 7:35pm

One thing everyone seems to agree on is that stagnant wage growth is a pressing economic problem. Business, government, the central bank, the federal Treasury, unions, economists, policy researchers, community groups and employees all see the benefits in rising wages. The lack of growth shackles household spending, which accounts for well over half of the economy.

The budget claimed to redress some of the problem, with mooted income tax cuts (most of which are delayed), and improvements to the bracket creep situation. And the government’s hopes of reducing corporate tax are showing signs of life.

But much can yet be done to lift the purchasing power of many of the households with the lowest incomes, where the pressure is accentuated by sharp increases in the prices of necessities including electricity and healthcare. The consensus is that raising the income of the lowest-paid is one of the most effective ways to stimulate the entire economy, because pretty much all the money is spent immediately on life’s necessities.

Last week the Reserve Bank of Australia said research had found that increases in the minimum wage had not resulted in any job losses or fewer hours of work. The paper found ‘‘no evidence that small, incremental increases in award wages had an adverse effect on hours worked or the job destruction rate’’.

&nbspCredit:Louis Douvis

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So, an increase in the minimum wage makes broad economic sense, and is beyond the control of politicians. In recent days, the Fair Work Commission ceased taking submissions for its annual adjudication on the minimum wage, a central feature of Australia’s industrial relations system. Last year, the rise was 3.3 per cent, a weekly augmentation of $22, the highest nominal amount in six years, taking the base wage to $694.90.

In 2016, the increase was 2.4 per cent. This year, the change in the minimum wage business lobbies are advocating ranges from zero to about 2 per cent, while the ACTU is pushing for 7.2 per cent, or $50 a week, more than twice last year’s increase. As many as 100,000 people recently marched in Melbourne in support of the union campaign. As ever, the commission will determine the outcome on the basis of sound economics, without having to unduly heed politics.

Another way to readily ease the burden on some of the most needy – while, again, supporting demand and stimulating the economy – could be to increase the job seekers’ payment, the Newstart allowance. This has not risen in real terms for more than a quarter of a century (from about $39 a day) and has failed to feature in the pre-election fiscal overtures from the Coalition government and ALP opposition.

The Prime Minister is resisting an increase though, saying: “Newstart is not designed to be a subsidy for the minimum wage. It is meant to be a safety net for people between jobs who are looking for a job. We strongly believe the best form of welfare is a job.”

The budget and the opposition’s reply left both sides with much financial flexibility (more of which should be used to cut the deficit and debt); there is ample room and reason to make the Newstart allowance sufficient to keep Australia’s 700,000 job seekers out of poverty.

One of the budget’s cornerstones is a sharp increase in the rate of wages growth. But there is no explanation for what has been widely described as an optimistic, even heroic, forecast. Increasing the minimum wage and the Newstart allowance and then directing more of the tax-cut kitty to those on low incomes – there is much room to add to the income tax cuts and to adjust corporate tax cuts – would help relieve a national constriction.

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